For a lack of interest

Weak growth coupled with inflation will determine the Reserve Bank's position on rate cuts.

The 2.4% rise in January industrial output is a weak turnaround from December when production actually shrank. Several industrial segments are still struggling and capital goods, a proxy for investments, continue to contract.

This makes the case for a further cut in interest rates, a standing demand from industry chambers. The extent to which the central bank will heed their plea will be determined by the inflation scenario, which does not look too good.

Retail inflation is running in the double digits and the Reserve Bank of India (RBI) must weigh a monetary expansion against entrenched inflationary expectations. Consumer prices are accelerating over food and not manufactured products, but the central bank will risk stoking general inflation by opening the credit tap.

The budget has provided for government expenditure to overtake next year's projected growth of the gross domestic product at current prices and a monetary easing could make the policy environment inordinately lax.

An expansionary monetary policy to pump up demand is a bit like pushing on a string. Against robust government expenditure, an accommodative central bank has two choices: maintain the status quo or tighten the credit flow.

Economic growth now carries a high political premium and the RBI will find it difficult to use interest rates to stop the economy from overheating. The last round of rate tightening did manage to tame inflation, but the collateral damage on growth was horrific.

The space for loose credit will have to be made by the government through spending cuts. The government is on course to meeting its fiscal deficit targets by severely compressing spending this year and anticipating healthy growth of revenues next year.

The case for large interest rate cuts can be made if the government has to revisit its revenue assumptions next year and cut back on spending accordingly.

Till then - and despite the change in its policy stance from arresting inflation to promoting growth - the RBI can take only baby steps on interest rates.